Well the bulls took a bit of a setback today. Economic data was weak, and then the CFO of Google pointed out that trees don’t grow to the sky. This was at least a temporary shock, although the dip in Google was bought aggressively, presumably by folks who believe that trees are different now and we don’t need the space elevator after all.

Are we finally starting down? At least we seem to have stopped going up, which is of course a prerequisite. And the housing sales data certianly seem to be particularly weak, not a good sign gor the legions of flippers and Option-ARM mortgagors out there, gambling on continued inflation in house prices. BTW, one thing I particularly dislike is the marketing spin that refers to houses as “homes”. Home is where the heart is, and cannot be bought and sold. A house may be a home, but a home may be a house, an apartment, a tent, a boat, anywhere where someone dwells in their particular version of home.

Oh well, I’m in Nanny Cay waiting for friends to arrive and then we’re off to Sint Maarten to watch the Heineken Regatta and perhaps perform a bit of quality control on the sponsor’s product.

Phase 1. Growth in consumption is curtailed as the consumer credit expansion due to housing slows. Employment is under pressure, as are wages and salaries, due to competitive pressure from the vast labor pool in China, India and Pakistan. “Core” inflation remains subdued. Headline inflation is significantly higher, as food and energy (and industrial commodity) prices continue to increase.

Phase 2. Mortgage defaults begin to rise significantly. Housing prices in the bubble areas are now off 25-30% from their peaks, but volume is very light and inventories are huge. The Fed begins to reduce interest rates. Bernanke opens with a big 1-2% reduction. The dollar declines against commodities. The yuan is allowed to rise significantly, as is the yen. Consumer prices begin to rise at a 10-15% annual rate, but incomes barely budge. Unemployment rises. Stagflation.

Phase 3. The housing market goes into full panic mode and major lenders are in trouble as defaults are widespread. Bernanke adopts Zero Interest Rate Policy (ZIRP), as the Bank of Japan did. The dollar goes into freefall and consumer prices soar, although unemployment continues to rise. Real family income has fallen by 50% from 2001.

Phase 4. Deflation and depression.

We owned shares in a couple of Canadian energy companies (Centurion and Transglobe) that have done well and have good prospects, but whose focus is in the Middle East (Egypt and Yemen, principally). I sold them today and reinvested the proceeds in Suncor. I think the political stability of Canada (and the reserve life of the tar sands) which Suncor offers outweighs the exploration and development prospects of the other companies.

We’re now positioned pretty much exclusively in stocks the bulk of whose assets are in more politically stable areas - companies like Encana, Canadian Natural Resources, Suncor, Cameco and so forth.

Watch out for lurching robots.

“But signs of a real unwinding of the so-called carry trade have gained strength in recent days and weeks, hinting that the currency markets could be on the verge of something big. First there was the now-familiar dump of New Zealand dollars. Then there was this week’s spectacular crash in the super-high-yielding Icelandic krona. And with talk of Japanese tightening gathering steam, some analysts are warning market participants against complacency in the weeks ahead.

“Once we do see a wholesale position unwinding, it has the potential to be quite a sharp move,” said Ian Stannard, a currency strategist at BNP Paribas in London.”

High-Yield Forex Jitters Point To Mkt Shift Risk

“WASHINGTON - Income growth stumbled at the family doorstep in 2004, new government figures show, declining by 2.3 percent after adjustment for inflation.

The Federal Reserve also reported Thursday that net worth grew, although at a slower pace than in 2001, the previous year for which the comparison was made.

The drop in inflation-adjusted incomes left the average family income at $70,700 in 2004. The median, or point where half the families earned more and half less, did rise slightly in 2004 after adjusting for inflation to $43,200, up 1.6 percent from the 2001 level.”

MSNBC